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The Engima of the ESG-Premium¶

Identifying the Existence of an ESG-Premium Across Emerging Markets¶

By: Avnika Dubey¶

Are We Nearing the End of the World?¶

At our current pace, the world will burn through its remaining “carbon budget” by 2030.

Who Should Be Held Accountable?¶

62% of GHG emissions stem from the Global South

92% of excess emissions stem from the Global North

At the heart of the issue:

70% of GHG emissions stem from the T-100 companies (since 1988)

ESG arose from governmental action on corporate emissions, beyond cap-and-trade and carbon tax methods.

Where Did ESG Come From?¶

Geneva Climate Conference, 1979: First use of the word ESG in response to industrially-induced climate catastrophes in North Germany

ESG Graph.png

Source: Google nGram

2004 - Who Cares Wins:

  • Popularization of word through UN conventional report
  • First glimpse of corporate accountability
  • Started an upwards trajectory in incorporation

2019 - BioScience - Climate Emergency:

  • Statement published by 11,000 scientists from 153 nations
  • Highlighted the disproportionate emissions rates of corporations
  • Decried the failure of flexible mechanisms and the need for regulation

44 Years + 682 Conferences Later: ESG utilized across U.S. and European markets.

The Focus: The Global North-ESG Premium¶

  • Over the past 20 years: Capital invested into testing environmental and social solutions
  • Robust, positive impact of ESG integration observed on 3 factors: A) Profitability B) Reduced Capital Costs and C) Environmental Consequences

cost of debt.jpg

Source: MSCI Database

Unequal Understanding: The Global-North Skew¶

image.png

Of my 44 initial sources on LitMaps, only 2 pertained to ESG in emerging markets.

Two Foundational Concepts: Emerging Markets Perspective¶

A) Garcia, 2020: Institutional Difference Hypothesis¶

The strength of a country’s social, economic, and regulatory institutions dictate both the robustness with which CSR is promoted and the magnitude of its pay-off.

image.png

B) Divergent Emerging Market Results - Lack of Conclusive Literature:¶

  • Liu, 2009: No correlation across 175 Chinese companies over 20 years
  • DuqueGrisales, 2021: Negative correlation across 107 multilatina firms
  • Dobers, 2009: ESG adoption depends on institutional and economic baseline

C) Personal Observation: Trends Among Equity Indexes¶

Tracking historical emerging market equity returns via the MSCI Index databases, I found a trend of higher returns among ESG-screened funds across all BICS countries.

Brazil¶

image.png

India¶

india graph.png

China¶

china graph.png

South Africa¶

south africa graph.png

In this research:¶

  • Address the literature gap considering recent positive observations
  • Perform a combinatory analysis across the BICS to study the IDH
  • Investigate the resilience of EM-ESG firms post-COVID-19

Research Question: Does there exist an ESG premium across the BICS countries?

Methodology¶

Variables¶

Independent Variables: ESG Scores¶

  • Controls: Regions, Market Cap, Financial Disclosures
  • Self-Curated Sample: 276 data points across three years
    • PS: Long-term outperformance considering:
      • Operational strategy
      • Management practices
      • Finite resources
      • Labor standards
    • GC: Adherence to four UN Global Compact principles to assess reputational risk

Variables¶

Dependent Variables: Return on Assets¶

  • Guage company profitably by analyzing asset usage to yield ratio
  • Employed across a variety of ESG literature as an unbiased predictor
  • Data gathered for 2020, 2021, and 2022 (Variable-Incompatibility)

The Four Regressions¶

Regression 1:

$ ln(ROA)_t = \beta_0 + \beta_1 PS_t + U_t $

Regression 2:

$ ln(ROA)_t = \beta_0 + \beta_1 GC_t + U_t $

Regression 3:

$ ln(ROA)_t = \beta_0 + \beta_1 PS_t + \beta_2 E_t + \beta_3 S_t + \beta_4 G_t + U_t $

Regression 4:

$ ln(ROA)_t = \beta_0 + \beta_1 PS (Non-Financial)_t + U_t $

*R4 Robustness Test: Financial companies artificially augment profitability metrics (OVB)¶

Results¶

Summary - Two Strong Sources of Bias¶

1. Sampling Bias (Range Meanings)¶

summary.png

PS variable average = 51 [Range: 40-65]

GC variable average = 59 [Range: 40-72]

2. Geographic Bias¶

geography.png

Regression Results¶

Overall, the regressions indicated a positive CSR-CP relationship.

Regression 1:¶

$$ ln(ROA)_t = \beta_0 + \beta_1 PS_t + U_t $$

reg 1 results.png

Keynote Findings:

  • Beta: 1 unit increase in PS score corresponds to a 0.22% ROA increase
  • R-squared value: PS score explains 34% of the variability in ROA
  • Valid intercept at -6.5

Regression 2¶

$$ ln(ROA)_t = \beta_0 + \beta_1 GC_t + U_t $$

reg 2 total.png

Keynote Findings:

  • Beta: 1 unit increase in GC score corresponds to a 0.09% ROA increase
  • R-squared value: GC score explains 7.9% of the variability in ROA
  • Decreased influence as pertains to adherence to UN Global Compact principles

Regression 3: Elemental Effect on ROA¶

$$ ln(ROA)_t= \beta_0 + \beta_1 ESG_t + \beta_2 E_t + \beta_3 S_t + \beta_4 G_t + U_t $$

image.png

Regression 4: Minimal Variability¶

$$ ln(ROA)_t = \beta_0 + \beta_1 PS_t + U_t $$

image.png

The regression outcomes underscore a robust, positive relationship between ESG integration and corporate profitability.¶

Continued Discussion¶

Missteps + Areas for Improvement:

  • Data Sampling: Collected from free, online database with ESG proclivity

    • Need a diverse array of companies
    • Must satisfy all conditions for causal inference

  • Presence of OVB: Firm fixed effects

    • Distinct company attributes affect each firm's ESG incorporation
    • Need to incorporate dummy variable to combat idiosyncratic effects

Potential Avenues for Future Research:

  • Observe whether returns to ESG vary based on firm size
  • Identify a marginal rate of depreciation associated with ESG integration

Next Steps: The Urgency for Incentives¶

Next 30 Years: EMs’ share of the global market cap will rise to:

35% by 2030 (50% for GDP)

47% by 2050 (60% for GDP)

55% by 2075 (68% for GDP)


It's imperative that profit incentives are identified to encourage EMs to adopt preventative ESG policies.

Thank you!¶